Managing An Inheritance to Make it Last

Managing An Inheritance to Make it Last

By Brian J. Cunningham, CFP®

Inheriting money from your parents brings a roller coaster of emotions. There is the loss of the loved one who bequeathed the gift and the realization that their passing will provide more financial freedom and new opportunities. Chances are your parents worked for decades, saving and sacrificing while looking forward to making your life and your children’s a little easier. 

Unfortunately, studies show that the average person who receives an inheritance spends it in a year or less. I strongly encourage my clients planning the distribution of their estate to start early and introduce me to their children so we can build a relationship. My objective is to help these adults in their 30s, 40s, and 50s understand how their inheritance will be structured and guide them to continue making the good decisions that allow their parents to amass the wealth they will receive. 

Don’t be Rash with Cash

It is very tempting for those receiving an inheritance to splurge on something like travel, a new home or car, education, or a business start-up. But as exciting as those might sound, the best first step is to determine your financial goals. Knowing what you hope to achieve will help you plan your path. Take time to think about your priorities and definition of financial security.  

Inherited Retirement Accounts

With every inherited asset, I discuss tax considerations with my clients. As a child inheriting an IRA and still working, you may be shifted into a higher tax bracket since the law requires that the assets be distributed over ten years. You can’t contribute funds from an inherited IRA to your retirement accounts, but they may help you maximize your retirement savings.

Sentimental about Stock 

It’s not uncommon for those bequeathed a significant amount of a specific stock to hesitate to sell it even though it is a step up in basis. The cost basis determines the taxes owed when the asset is sold. If the price of an inherited asset is higher than the original purchase price, the cost basis goes to the higher price, minimizing capital gains taxes owed if the asset is sold later. But when I hear, “Dad worked for that company for years and always believed they were a good investment. I can’t imagine selling it.” I must be sensitive to this emotional attachment while explaining that a stock that was a smart buy in the ’70s and ’80s might not be the best choice moving forward. 

When the Gift is a Property or Business

Remember that first step, the financial goal setting? If keeping this property or business supports your short-term and long-term goals, you may wish to keep them. There is often an overwhelming emotional connection to a family-held property or business. In many cases, a comprehensive and objective analysis of the cost of maintenance, renovations, day-to-day operation, liquidity, and cash flow makes it easy to sell. As with stocks, you’ll benefit from a step-up in basis, and I can refer you to a highly qualified real estate or business broker to help with the transition. 

Next Steps

Successfully managing your inheritance includes considering new ways to invest to create lifelong wealth for you and future generations. There are almost limitless choices, but my advice will reflect decisions based on the size of your inheritance, your current financial position, and yet, again, your financial goals. We may discuss contributing to an IRA, either traditional or Roth, maxing out your company retirement plan, or adding to a health savings account. We may adjust your brokerage account or consider buying rental property or investing in a diversified pool of real estate through REITs, ETFs, or mutual funds, or stocks or bonds. The opportunities we identify depend on your unique situation and plans for your retirement. Whatever direction you choose, you’ll have confidence that the valued advisor who guided your parents is helping you pursue your financial goals. 

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.